Saturday, January 25, 2014

A Failed Economist

As Lorne over at Politics and Its Discontents noted yesterday, there has been much gnashing of teeth as the Canadian dollar has slid down to 90 cents (U.S.) But Tom Walkom writes this morning that the dollar can and should fall farther:

With luck, it will end back up at roughly 80 cents. Under the purchasing power parity rule, which compares the prices charged for identical goods in two countries, that’s about where it should be.

The rise of the dollar was predicated on the prime minister's ambition to turn Canada into a petro state and himself into a blue eyed sheik. But that dream is beginning to crumble:

There are more fundamental reasons behind the dollar’s decline. One is that commodity prices are easing world-wide – which means there is less demand for the currencies of countries, like Canada, that export natural resources.

Another is that the U.S. dollar is rising – largely because traders expect that country’s central bank, the Federal Reserve, to hike interest rates. (So-called hot money tends to flow into whichever country offers the highest yield).

Mr. Harper's dream of building a Canadian economy on a 19th century strategy simply isn't succeeding. And no matter how many loonies he spends on advertising, trying to convince Canadians that sound economic management depends on sending bitumen to foreign markets, it's clear that the game is up.

Mr. Harper is a failed economist.


The Mound of Sound said...

No one guided by belief, ideological or religious, instead of fact can perform very well in the realm of economics, Owen.

You will recall, and most don't, that just as Harper was preparing to unlock the Liberal shackles that restrained Canadian banks from indulging in the Casino Capitalism sweeping the States, Canada was rescued by the 2008 global economic collapse. He'd already done some damage for permitting, for example, extended term/no money down mortgage financing, but not remotely what he had in mind.

Then, when the 2008 Great Recession hit, Harper said 'no one saw it coming,' a complete lie. There were plenty who saw it coming and sounded alarms - Nouriel Roubini, Paul Krugman, Joe Stiglitz and others. They explained, over and over, what was coming and why. Harper chose not to believe them because that didn't comport with his ideological bent.

Unfortunately economics is a deeply flawed, social science. Proof of this comes from its reliance on 'externalities' or facts that are omitted from basic models. Hence most economists continue to fervently believe in infinite growth at compounding, or exponential, rates. They even target for 3% growth as ideal. Run that through a compound interest calculator for a couple of centuries (the interval since the advent of the industrial revolution) and the end result is mind-boggling.

That's why modern economics is like watching children in a sandbox. Harper is the kid peeing in the corner.

Anonymous said...

Steve didn't study at Harvard, Princeton, Yale, the London School of Economics or the University of Toronto. He studied at cow town college. And, let's face it, the economics faculty at cow town college are not exactly the sharpest tools in the shed.

Richard said...

The rise of the dollar had nothing to do with the petro-state. It had to do with the U.S. devaluing it's dollar faster than we could devalue ours. Your third point:

Another is that the U.S. dollar is rising – largely because traders expect that country’s central bank, the Federal Reserve, to hike interest rates. (So-called hot money tends to flow into whichever country offers the highest yield).

-- Is actually the only reason behind the Canadian dollars accelerated decline. The U.S. dollar is not rising, it's simply not devaluing as fast as the Canadian dollar due to expected withdrawal of stimulus.

Canada's dollar has continued to devalue because we are stuck in our a liquidity trap of our own making where cheap loans and currency expansion are needed to prevent housing from collapse and keep consumer spending pumping up GDP.

I've written about this in full here:

Richard said...

The federal reserve is the *only* reason our dollar is now dropping against the USD while Canada maintains low interest rate policies.

It has nothing to do with "dutch disease, petro-state", etc. As soon as the Federal Reserve's taper fails (again) we'll be right back up at parity with them.

Canada now must maintain cheap loans to continue fueling an overvalued housing market and consumer spending. It's called a liquidity trap and we're in this liquidity trap because to maintain exports with the USD while they were devaluing their dollar we had to devalue ours and this has lead to asset bubbles like housing. The alternative would have been that the CAD would have risen above parity with the USD cutting off exports with them. But now that they are not weakening their dollar as fast (yes, its still weakening) we have pulled ahead in the race to the bottom and can't stop devaluing or it'll cause a deflationary collapse of our currency. Already repeated talk of "low inflation" from the BoC shows where their concern is, they're not talking about price inflation, they're talking about credit inflation.

I've written on this subject in full here:

Owen Gray said...

Their function is to support the local economy, Anon. Macro economics isn't their specialty.

Owen Gray said...

Thanks for the link, Richard. I agree that the devaluation of the U.S dollar has a lot to do with the value of the loonie. It goes back to Pierre Trudeau's observation about the difficulty of living next to an elephant.

But, as with other exporters of commodities -- like Australia -- our economic good fortune has been tied to rising commodities prices, which created another trap -- what Harold Innis called the "resource trap."

Harper has put all of Canada's eggs in the bitumen basket -- not a wise policy.

Owen Gray said...

People like Milton Friedman tried to transform economics into a physical science, Mound. They insisted that it was governed by hard and fast rules.

They scoffed at John Kenneth Galbraith, who believed that economics only made sense within the context of politics and history.

The people who saw the Great Recession coming knew that Galbraith was right. Harper didn't see it coming because he was infected by the chimera that economics was a "hard" science.

Steve said...

Harper has turned Canada's institutions aside from the Supreme Court into an echo chamber. How did that work out for America? Harper is our Dick Clark of economics.

The thing about the tar sands is they do not make economic sense even removing the environmental costs. Its like the old KGB selling Russian resources cheap to the western marketplace. Its like a street person stealing your Trek bike and selling it for scrap aluminum for $20.

Hugh said...

If they are targeting 3% growth, that might not sound like much.

But using the divide into 70 rule, at 3% the economy would double in 23 years.

Owen Gray said...

But those hard and fast mathematical rules don't always apply, Hugh. The truth is that markets are imperfect -- like human beings.

Owen Gray said...

Peter Lougheed knew that, economically, the tar sands was a bad investment, Steve. Unlike Mr. Harper, he possessed a Harvard MBA, as well as a law degree.

Lougheed's skepticism about the tar sands got him kicked out of Calgary's petroleum club. As a member from Calgary, Harper counts on support from the oil barons.

e.a.f. said...

Lougheed was very much smarter than harper and it wasn't just an educational thing.

The Canadian $ is tanking because there isn't anything to sustain it. Harper wanted the $ to be based on an oil based economy. that hasn't worked and because manufacturing has declined, there is just too much unemployment and under employment in Canada to have a $ which is worth all that much. The decline in the Canadian $ is simply an outward sign of the decline of the country.

Owen Gray said...

It seems clear that Harper is prepared to let unemployment rise, e.a.f. As that happens, capital will flee the country -- and the dollar will decline.